Looking to save on tax through EPF and NPS? Think again

Let’s face it. We are all looking to save on tax whenever and wherever possible. After all, no one really wants to see their hard earned money siphoned away by the government.

Two of the more popular tax saving schemes utilised by Indian citizens have been the Employee Provident Fund (EPF) as well as the Public Provident Fund (PPF). Individuals partaking of these schemes have always enjoyed tax benefits on their withdrawals. However, things are set to take a turn for the worse with the new budget rolled out by the government.

According to the new budgetary regulations, both Employee Provident Fund as well as National Pension Scheme withdrawals are set to be taxable, at least partially, at the time of retirement of an individual. This could put a serious dampener on your hopes of retiring with a nice chunk of change in your kitty.

What Is The Difference Between The EPF and the PPS?

As you probably already know by now, the main aim of the PPF was to help the self employed as well as unorganised sector workers to earn a regular income post their retirement, while the main aim of the EPF was to help salaried employees build a corpus to provide security post their retirement. So far, no tax was levied on the Employee Provident Fund, whether on investment, interest earned or on any withdrawals made, while with regards to the PPS, only the amount credited to the individual’s bank account was taxed.

How Does The New Budget Affect Both The EPF and the PPS?

As per the new budget guidelines for EPF, 60% of your post retirement savings will now be taxable, while the remaining 40% will remain tax free.

However, for corpus built under the PPS, individuals are required to purchase annuity plans with the remaining 40%, while the other 60% of the corpus will be taxable. To illustrate this better, if you compiled a corpus of Rs 20 lakhs through the PPS at the time of your retirement, you will be required to purchase an annuity plan with at least Rs 8 lakhs, while out of the other Rs 12 lakhs that is credited to your bank account, Rs 7.2 lakhs will become taxable.

While this might come as a bit of a shock to the system, the government's reasoning behind such a move was to ensure that all retirement plans and schemes are looked upon in the same light. Since the Employee Provident Fund always held an advantage over schemes like the PPF or the NPS due to its propensity to attract better tax benefits, the new budgetary regulations look to close this gap.

Despite all this, the Employee Provident Fund still remains a more attractive tax saving solution due to contributions by a salaried individual’s employer and more importantly due to the fact that EPF account holders can make withdrawals at any time of their choosing to meet any needs or requirements they might have.